Case for planting 2009 cotton
Mar 11, 2009 9:57 AM,
By Robert Coats
Professor/Extension Economist
University of Arkansas
A slide show that complements this article and compares cotton per-acre returns to specified costs of corn and soybeans can be found online at: Case for planting cotton.
The economic events of the past six months and the resulting grain crop prices may be causing us to understate Delta cotton’s potential competitive position in the 2009 crop mix.
Given the recent past performance of grain prices, it is understandable that Mid-South cotton producers would consider cutting back on their cotton acreage in 2009.
The recent National Cotton Council U.S. cotton producer 2009 perspective planting survey shows Mid-South cotton producers intend to plant 23.4 percent fewer acres of cotton in 2009.
Will grain prices continue to outperform in this current deflationary economic setting and through the 2009-10 marketing period?
No one has a crystal ball, but I expect that cotton prices may become increasingly competitive and attractive as grains continue to pull back due to slowing global growth and uncertainty about U.S. and global financial institutions.
The risk exposure that our row crop producers face is amazingly high — probably the most they have experienced in their careers as farmers. I expect price volatility to continue. Looking forward, row crop prices and input costs may surprise to the downside and surprise to the upside before the end of the 2009 marketing period, which for cotton would be July 31, 2010.
In 2009 it will be important for Delta cotton producers to have a production game plan that will cash flow and contribute to the growth or survivability of their farms. I understand for some, cash flowing cotton compared to the alternatives has been problematic, which is why now more than at any other time in decades, cotton producers and their lenders, landowners, and suppliers must be in tune with each other’s financial well-being and risk exposure.
What is the case for planting cotton in 2009?
Sure, the cotton industry is experiencing consolidation, but this is a sector built to survive, overcome adversity and emerge a stronger, leaner, competitive sector.
Grain prices appear to have more weakness than strength, so if a producer has not priced his grain alternative to 2009 cotton, the alternative grain advantage may have been or soon will be lost.
Tough economic times could cause grain row crop prices to fall further than most expect. In this deflationary global economic setting, traditional rice and cotton farms still may make the best farm business platforms from which to overcome economic adversity through size, productivity, possible diversity, and/or other adjustments to maximize returns to the farm business.
Cotton base protection still needs to be considered. Why? These are extraordinarily uncertain economic times. Future farm bills could easily re-establish future cotton base acres to reflect the actual previous planted acres.
Grains, biofuels, aquaculture, animal confinement, and horticulture will some day have a more prominent position in the economic future of the Mississippi Delta region, but given the current economic setting, rice and cotton’s importance should not be underestimated.
The traditional cotton farm government program is built to provide a reasonable safety net for cotton producers and the sector in times of economic turbulence and uncertainty. A quick review of benefits:
— The cotton loan program still provides price support and marketing flexibility. The cotton loan rate is 52 cents per pound.
— The marketing loan gain (MLG) or loan deficiency payment (LDP) is still available and very important in times of global deflation like in 2000-02. Cotton continues to use an adjusted world market price formula, so for Arkansas cotton producers, when the U.S. farm market price reaches 52 cents per pound, the added MLG/LDP rate could provide a possible floor of around 55 cents per pound.
• The MLG/LDP is available on all cotton production and has no payment limitations.
• Producers, especially those with professional marketing assistance, have a number of marketing options to consider by coupling the market alternatives with the MLG/LDP program.
— The cotton producer has a maximum possible counter-cyclical payment (CCP) rate of 12.58 cents per pound when the farm market price for the marketing period averages 52 cents per pound or below.
• The CCP will be made whether cotton is planted or not, but the point here is to consider the value of this payment in future farm bills. Compare its value to corn or soybeans. We truly don’t know the degree of future deflation or inflation. Select commodity average counter-cyclical payments per base acre for Arkansas row crop producers are as follows:
Cotton — $73.56
Corn — $30.77
Soybeans — $7.28
Rice — $70.55
Wheat — $23.04
• While I’m on the CCP, I will say that this does not appear to be the economic time period to experiment with the new optional counter-cyclical Alternative Crop Revenue Election (ACRE) payment program, but I will discuss ACRE in a later article.
— The direct payment rate for cotton is 6.67 cents per pound. The cotton direct payment, like the cotton counter-cyclical payment, is not dependent on cotton production, but is paid annually on the FSA farm’s established base acres and yield times an adjustment factor. The average Arkansas direct payment per base acre for the primary row crops are
Cotton — $34.30
Corn — $16.35
Soybeans — $7.95
Rice — $89.61
Wheat — $16.81
Cotton gin rebates have the potential to add to the bottom line. Of course this will depend on the future value of the oilseeds.
Quality cotton can bring an additional 2- to 5-cent premium price.
Biofuels contribution to farm income will remain important, but may disappoint with lower-than-expected corn prices during this period of uncertain economic times.
Row crop input prices uncertainty make all of us feel like we have vertigo, so it’s worth repeating that Mississippi River Valley Delta cotton producers and their lenders, landowners, and suppliers must be in tune with each other’s financial well-being and risk exposure and try not to compromise the region’s basic cotton infrastructure.
Capitalize on cotton and row crop price volatility through co-ops or seek the assistance of a marketing professional.
